Nov. 30 (Bloomberg) -- Chancellor Angela Merkel is facing a revolt by state leaders from her own party against planned tax cuts for next year, piling pressure on her government as it seeks to spur economic recovery and fight joblessness.

Peter Harry Carstensen, the Christian Democratic premier of the northernmost state of Schleswig-Holstein, has threatened to block the tax-cut package next month when it comes before the upper house of parliament, or Bundesrat. CDU leaders in Saxony- Anhalt, Thuringia and Saarland have also complained about the cost of funding the step and are lobbying Merkel for a solution.

Horse-trading over tax cuts worth 6.1 billion euros ($9.2 billion) next year may deal a further setback to Merkel’s month- old coalition after the Nov. 27 resignation of a Cabinet minister over the war in Afghanistan and General Motor’s Co.’s rejection of her favored option to sell its Opel unit. Bild, Germany’s biggest-selling newspaper, said today that Merkel is suffering a “horror start” to her government.

Economy Minister Rainer Bruederle sought to downplay the seriousness of the tax dispute, saying that he was “relatively certain” the Bundesrat would pass the law by Dec. 18, when it is next due to meet. “These distribution fights are part of German federalism -- they aren’t always pretty, but they’re part of the system,” he said today on broadcaster N-24.

Germany’s 16 state governments are represented in the Bundesrat, where Merkel needs the support of all regions ruled by her bloc to pass laws that affect state finances. The finance committee of the lower house, or Bundestag, is holding a public hearing on the measure today, with lawmakers due to vote later this week. To take effect by Jan. 1, the package needs the approval of both houses of parliament.

Coalition Pledge

Merkel’s Cabinet on Nov. 9 backed the package of tax cuts as part of the government’s efforts to pull Germany out of the deepest economic recession since World War II. Merkel’s coalition of her Christian Democratic Union and the pro-business Free Democratic Party was sworn in on Oct. 28 with a pledge to cut taxes by 24 billion euros over its four-year term even as the budget deficit widens.

“One or two states are letting it be known that they’re not too happy with losing revenue,” Michael Meister, the deputy parliamentary chairman of the CDU, said in an interview. “With those states letting off steam now we have the chance to make small technical adjustments to the draft bill, though time is wearing on.”

Schleswig-Holstein’s Carstensen isn’t alone in demanding something in return from the federal government for the lost revenue from his state, his spokesman, Knut Peters, said today. The measures will cause a loss of revenue of 130 million euros for the state and communities, Peters said.

‘Lacking Foundation’

The League of Taxpayers in Germany, or BdSt, welcomed the cuts, according to a statement on the finance committee’s Web site. The labor union-affiliated IMK institute, in its evidence to the committee hearing today, rejected the reductions as “lacking foundation in economic theory.”

The parliamentary opposition -- made up of the Social Democrats, the environmental Green Party and the anti-capitalist Left Party -- has also rejected the measure as irresponsible.

Merkel has repeatedly justified the tax cuts as necessary to help growth with the economic crisis far from over. Germany “will be feeling the effects, particularly on the labor market, in the coming months,” Merkel said two days ago in a video message on her Web site.

The 2010 cuts, due to rise to a total 8.9 billion euros in 2012, come on top of about 10 billion euros in tax cuts approved in June by Merkel’s previous coalition with the Social Democrats. The measures include an increase in children’s benefits, an easing of the inheritance tax for small businesses and breaks for companies. Critics have taken aim specifically at a reduction in the value-added tax on overnight stays in hotels to 7 percent from 19 percent.

To contact the reporter on this story: Patrick Donahue in Berlin at at pdonahue1@bloomberg.net.

Last Updated: November 30, 2009 07:53 EST